Trusts – for when a Will is not enough

We can’t predict what will happen after we die – but we can prepare for it. Unforeseen circumstances can lead to families being effectively disinherited, or at least having to wait much longer than expected for their inheritance. You can remove this area of uncertainty quite simply, by setting up a trust.

Even though most of us take too long to get round to it, we all know deep down that we need to make a will, so that our loved ones are taken care of if the worst should happen. Unfortunately, ‘the worst’ in this case isn’t simply reaching the end of your life. We know that’s inevitable. No, ‘the worst’ can sometimes be the things that happen when you’re no longer around to prevent them.

Take the example of Craig and Lisa. They’re happily married with children, but pragmatic enough to realise that one or other of them may die prematurely, whether through illness or accident. Each is also comfortable with the idea of the surviving spouse re-marrying, if the opportunity arises. But what neither wants is for their children to suffer unintended consequences.

First things first: make a will

Both Craig and Lisa have made wills stating that if they die, all their assets will go to their surviving spouse. This is to avoid one of the potential hazards of intestacy law. If Craig, for instance, were to die without a will, then Lisa would inherit the first £250,000 of his estate, but only half the remainder. The rest would be divided equally between their children, becoming accessible when the children reach the age of 18. It is not unheard-of for a widow or widower to find that a portion of their house is now out of their ownership, held in trust for their children – some have even been forced to sue their own children to recover it.

By making wills, Craig and Lisa can avoid this fiasco. However, another potential problem could arise if either should be widowed and then remarry.

The (possible) perils of remarrying

Let’s suppose Craig is the first to die, and a few years later Lisa meets and then marries a new husband. If Lisa were then to die, her new husband could then inherit much or even all of her wealth, leaving her and Craig’s children with nothing.

For instance, if Lisa were to die before she got round to making a new will, then intestacy law would apply – resulting in Lisa’s new husband (let’s call him Tony) inheriting the first £250,000 and half the remainder. But it could be even worse – Lisa might have made a new will leaving everything to Tony, trusting him to do the right thing by her children. Understandably, Craig isn’t prepared to put such trust in a man he’s never met.

Lisa has similar worries about what might happen if she dies and Craig remarries. How can each be sure that the new spouse won’t make off with the family wealth and leave their kids in the lurch?

You might think this is an easy one to solve – the surviving spouse could make a will bequeathing all or most of their assets directly to their children. But Lisa may never get around to doing this (especially if Tony succeeds in persuading her not to). The situation may be further complicated if Lisa and Tony have by that time bought a house together – trying to unpick what is Lisa’s and what is Tony’s could be a lengthy and costly puzzle.

So how can Craig and Lisa both guarantee that their children will inherit what is rightfully theirs, without causing undue trouble for any future spouses they may have? One of the most effective solutions is to use a trust.

Why you can trust in a trust

Craig and Lisa could each place some of their assets into a life interest trust for their children. A life interest trust is one that allows another party to benefit from the assets held within it for as long as they live. So for instance, if Craig dies and leaves his share of the house in a life interest trust, Lisa can continue to live in the house for as long as she likes. When she dies, Craig’s share of the house (held in trust) will go to the children, becoming accessible when they reach 18.

What if Lisa wants to move house? A trust should not cause any serious obstacles there. If Lisa sells the house, then the value of the part that is held in trust will remain in the trust as funds. Lisa could even use those funds towards buying her next home – the value would simply remain in trust, so the trust would own a corresponding portion of the new property.

Any funds held in trust can only be withdrawn for the benefit of the children. However, the person with the life interest (in this case Lisa) can take any interest from the funds as income. Only the original capital sum is protected.

How to set up a trust

To give their children maximum protection, Craig and Lisa should ensure that they own their home as tenants in common, and that each spouse’s share will pass into the trust according to the terms of their will. Whichever one of them dies first, the surviving spouse can be one of the trustees of the life interest trust, so can be involved in any decisions regarding it. The couple will also have to select other trustees, who can be relied upon to put the children’s interests first but who will also consider the wishes of the surviving spouse and work with them.

As you can probably imagine, setting up a life interest trust can be a complex process. You will certainly need the help of a solicitor, and it is a very good idea to consult a financial adviser at the same time. A financial adviser can help you decide how best to arrange your estate to deliver all your goals: protecting your children’s interests while also taking care of your surviving spouse. Your adviser can also anticipate potential hazards and unforeseen consequences, and so prevent them from happening.

What happens after we’re gone may seem as though it’s beyond our control. However, with professional advice it’s possible to retain far more control than you might think.

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